Legislation to raise top personal tax rate introduced

  • Michael Cullen

The Government today introduced legislation to increase the top personal income
tax rate to 39 percent for income over $60,000 from April 1, next year.

"The increase will affect only about 5 percent of the workforce, those who can
most afford to contribute a bit more to the country's well-being," Finance and
Revenue Minister Michael Cullen said.

"The change is expected to bring in around $400 million a year for new spending.
Half this will be paid by people earning over $140,000.

"The Government will put the additional revenue to good and careful use. Some
will be directed to creating new jobs and expanding the export base through our
industry and economic development package.

"The rest will go toward the Government?s social objectives, including the
reversal of the 1999 pension cuts and the abolition of market rentals for low
income State house tenants,? Dr Cullen said.

"Inland Revenue estimates the 39 cent step will raise an extra $465 million a
year in new revenue. But around $70 million of this will come from attendant
changes to the Fringe Benefits Tax and the Government intends to amend the FBT

"We are looking at ways of lowering the tax rate on fringe benefits provided to
lower-income employees. If viable solutions to this long-standing problem can
be developed in time, we hope to introduce legislation early next year, with
possible effect from 1 April," Dr Cullen said. [For further details, see
accompanying press statement.]

Personal tax rates for income up to $60,000 will remain the same. The rates
are 15 percent, 21 percent and 33 percent, depending upon income level.

"The increase in the top personal tax rate is a modest one, and the new top rate
of 39 percent is lower than, or in line with, that of many other countries," Dr
Cullen said.

"The top personal tax rate in Australia is 47 percent, in Ireland 44 percent, in
the United Kingdom 40 percent, and in the United States 39.6 percent."

Also contained in the proposed legislation are changes arising from the increase
in the top personal tax rate to 39 percent on income over $60,000:

* The extra emolument rate for lump sum payments such as bonuses will
increase to 39 percent for high-income earners.

* Employees with secondary income can choose the new 39 percent rate for
secondary employment earnings.

* Similarly, taxpayers who earn interest income can choose to have it taxed
at 39 percent.

* The non-declaration rate for resident withholding tax (for taxpayers who
have not declared their IRD numbers to their banks), which was legislated to
increase to 45 percent on 1 April, will instead reduce to 39 percent.

* The fringe benefit tax rate will increase from 49 percent to 64 percent to
prevent people using fringe benefits to avoid the higher top personal income tax

The increase in the fringe benefit tax rate will apply from 1 April 2000. The
other changes will apply from the 2000-2001 income year.

The legislation, which is expected to pass through all stages and be enacted
this week, is contained in the Taxation (Tax Rate Increase) Bill.

"The Government is looking closely at limiting opportunities to avoid the higher
top personal tax rate through use of such vehicles as superannuation schemes,
trusts and personal service companies," Dr Cullen said.

"So my advice to anyone considering aggressive measures to avoid the higher tax
rate is to think again."